PEACE ECONOMICS: From a Killing to a
PROLOGUE A Vicious Cycle:
The current economic crisis has many
faces. Here is one:
the famous 1974 Black-Scholes equation
to find the "correct price" for financial derivatives.
Based on partial derivatives over time, this is classical calculus
for continuous change; useful within a zone of stability, but not at
the edge, the tipping points explored in René Thom's catastrophe
theory from 1971. Intellectually this is like calculating the
increasing speed of an accelerating car heading for an abyss without
warnings. But, with warnings maybe no 1997 Nobel (actually the
Swedish State Bank) Prize in Economics?
One year later
their company, "Long Term Capital Management", had
liabilities of over $100 billion.1
The trade in derivatives is now at $1 quadrillion a year, ten times
the industrial economy of the 20th century. Many get rich, but theirs
collapsed. Maybe prison would have been more adequate for
That equation is a part of the closed
paradigm of economism. Does it offer a solution, not only for banks
and bankers, but for the bottom 99.9%? The 0.1%/99.9% income ratio in
USA 2007 was 140; an unbelievable inequality, both cause and effect
of the crisis.
Some look at
Germany's decreasing unit labor cost 2005-2011 and high employment.2
With top rate quality export products and a single euro currency,
their eurozone trade surplus grew from 64 to 140 billion euros
2002-2009. They financed the trade deficit of
with credits from German banks, at the end of 2009 to the tune of 522
billion euros. But they do not invest in GIPSI, only offer higher
interest credit for them to pay back the credits, thereby putting the
GIPSIs in debt
A very dangerous policy, close to a tipping edge, endangering not
only the euro and the economy, but the European Union peace project.
Are there alternatives? Of course,
stimulus, not bail-out.
A policy of debt
bailing out legitimate creditors, letting other banks collapse, would
be better than a debt bondage feeding hatred of the creditor,
invoking nazism memories, like Greece does.5
We need good debt maps to design
intelligent forgiveness policies for households, municipalities,
countries, regions. The way out of a complex man-made catastrophe is
not to punish the victims.
But we also need
political action unlikely to come from the Berlin-Frankfurt-Brussels
triangle. One strong formula would be GIPSIs
unite, you have only your German banks to lose.
They could jointly negotiate better terms, rejuvenate the
countryside, increase intra-GIPSI trade, lift themselves out of
bondage. But illegitimate, maybe illegal Goldman-Sachs has former
employees as prime ministers in Greece and Italy, economy minister in
Spain and top of the European Central Bank. That spells finance
economy, not real economy.6
Inside victim countries
periphery-periphery cooperation could alleviate much suffering
from basic needs deficits. Class warfare from above has sent the
economic shocks downward to the vulnerable: the women, the older, the
younger, the excluded, depriving them of money for
food-clothes-housing-health-education. But the old lady in poor
health with little money may offer housing to the younger in good
health, against cleaning, helping, company. Money may not change
hands: service for service, hours for hours, sharing togetherness.
A farmer produces food; student farm
hands could pay with culture. Neighboring farms could share sales
points directly from producers to consumers. And at a world level a
four lane highway through Africa could make Latin America, Africa and
Asia revive, and expand, the 500 AD-1500 AD globalized real economy
trade. GIPSI countries might link to that South-South-South through
counteracts the inequality of hierarchy-exploitation, lifting the
bottom up. Legislation is of no avail if the politicians have
been bought by Big Capital.
In the giant Chinese 1991-2004
lifting up of 3-400 million, the local community was the unit of
development. The five-pronged approach--the public, private, civil
society, technical sectors, and a coordinator, in China the
party--gave micro credit to small companies dedicated to producing
necessities, food-clothes-housing-polyclinics-schools at low cost and
price, and to employing the most needy. When their own needs
were met, they sold to others at low prices, paid back the credit and
entered the economy with some cash in the pockets. Capi
-communism, the latter for needs, the former for wants and
markets. But the extreme West, the USA, may not bridge this gap
Some of the finance economy should be
punished, criminalized, like those who give credit far beyond their
capital, and those who contract loans far beyond their earning
capacity. The worst finance economy dealers should be boycotted and
local saving banks favored; global economies should be balanced with
more local economies.
The whole focus of
economics should be changed from the growth of the market economy to
meeting basic needs. From GNP to HDI, the Human Development Index of
basic needs satisfaction. The Czech economist Tomás Sedlácekvii7
concludes from the years after communism that egoism is not the
alternative; some state regulation is indispensable.8
There will be more
approaches and alternatives as more leave the sinking ship of
neo-liberal economism. The neo-liberals betrayed us. Had distribution
measures come with growth measures like latitude with longitude
rising, inequality within and between countries the last decades
would have become a key issue and led to policies.9
Rather than the horror of the likely, available, use of war
as the ultimate stimulus to get a stagnant inflation-deflation
economy running again.
But rational policies run against
inegalitarian class society.
The top became
super-rich. Those at the bottom sank into misery, illness, death
unless lifted up to meet basic needs. The inequality in wealth
economically came with inequality in force militarily, in power
politically and culturally in values that legitimize power
authorizing force protecting the wealth of the super-rich; the US 1%
That inequality causes crises that cause even more inequality. How?
Of these four the
economy defines the discourse. But not the real economy based on
land, industry, knowledge, technology; but pure capital, the finance
economy. The economists showed a way to rising inequality, like the
formula to calculate the value of an option before it matures so that
it can be sold and bought at any time. This leads to ever longer
chains of buying and selling derivatives (derived from options), on
bets, on bets on bets; a finance industry with catastrophic system
even betting on basic needs, like housing, food13,
trusting that the demand for necessities is inelastic.
derivatives change hands a commission is charged. The longer the
chain, the higher the unit price--like for drugs, the poor man's
derivative--up to a tipping point: a crash with much value to the
penultimate seller. For real estate, construction industries, banks
and people facing foreclosure: a catastrophe.15
This is not
"casino capitalism"; a casino gambler bets his own money
for own gains or losses, up to suicide. Derivative economy bets with
other peoples' money, pockets the gains, lets others take losses and
suicides; even clients they advise, and then bet against.16
A very vicious practice derived from
a very vicious theory. There is a link between rising inequality and
economic crisis: the less acquisitive power for the bottom 90-99%,
the less real economy growth, and the more the top 1% has to rely on
finance economy growth.
the larger the gap between high growth in the finance economy and
little or no in the real economy, the more out of touch with reality
the financial objects, the higher the probability of a crisis,
quickly as a crash, slowly as a crisis.17
The vicious circle of two-way
causation is here: more inequality, more crisis, the more crisis the
more inequality. The high up want even more return on their money,
the low down are steeped in struggle against misery. Alternatives
stand a poor chance. What came first in our predicament, inequality
or crisis, is a chicken-egg problem.
But the "roots of inequality"
are worth looking at. There will be three perspectives: actor
attributes, actor interaction, and system structure.
Three independent, but synergizing, sources of inequality.
Attributes. People differ in
physical force, perseverance, intelligence, postponement of
gratification, risk-taking, empathy, creativity, solidarity,
ambiguity tolerance, spirituality; and family background,
egoism, greed, stinginess, cheating, lying, narcissism, paranoia,
10 positive, 10 negative: those justifying inequality as well
deserved emphasize the former, those against the latter, as proof of
injustice. Analysts use both.
Interaction. The general
formula is "unequal exchange". But how can some people
demand much higher pay per hour of work, and much more from an
exchange, than others? Two answers will be indicated: the mind-body
distinction, and accumulation along interaction chains.
Structure. The general
inequity formula is center-periphery interaction;
center-center and periphery-periphery are more equitable. The four
class resources--wealth, force, power, values--are more available to
the top, are convertible, and generate ever more center-periphery
distance. In addition, topdogs easily meet, interact with their
underdogs; but they are limited by resources, space and time.
In the first year it made a 40% profit, having borrowed over 25
times its equity. In 1998 it lost $4.6 billion, and was bailed out
by a group of banks supervised by US Federal Reserve. See
Floyd Norris, International
17 February 2012.
Rune Skarstein, the leading Norwegian economist on the crisis, in
16 March 2011. The CIA World
lists 190 countries according to current account balance (exchange
rates, not purchasing power parity, PPP): No. 1 China, No. 2 Japan;
No. 190 The USA: World
Debt Bondage I
(the US debt to China is $727 billion, to Japan $626 billion, very
close, then EU). No. 3 Germany; Nos. 180-185-188-189 4 of the 5
Debt Bondage II.
Could The USA
de-encircle China in return for debt forgiveness?
Could Germany forgive
debts in return for better relations?
April 2012 lists many cases: in 1868 The USA canceled the debt of
the Southern states after the Civil War, in 1898 The USA canceled
the Cuban debt to Spanish creditors, in 1918 the Bolsheviks did not
recognize the debts incurred by the Czar, in 2003 The USA asked
Germany, France and Russia to cancel their demands on Iraq, in 2007
Ecuador declared major portions of their debt to be illegitimate, in
2008 the people of Iceland refused to pay the debts incurred by a
private bank to among others Dutch and English creditors. Of course,
the debtors take the initiative, not the creditors; wisdom might
turn this around.
Among the reasons to avoid bail-out is suspension of the punishment
aspect of the market, socializing the losses while privatizing the
gains, encouraging the finance economy to stay its wrong course,
using the real economy to subsidize the finance economy; speeding up
The Final Report of
the National Commission on the Causes of the Financial and Economic
Crisis in the United States, Public Affairs 2010 is one more of
those US report, like on the Kennedy murder and on 9/11, leading to
more questions than it answers, as Jeff Madrick makes very clear in
his review in The New York Review of Books, 28 April 2011:
"These regulators are by and large the same agencies that
tolerated the excessively risky behavior in the first place. Even if
they write effective rules they will face pressure from Wall Street
lobbyists..." (p. 70).
See Greg Smith, Why
I Left Goldman-Sachs: A Wall Street Story,
New York: Grand Central Publishing, 2012; following Michael Lewis
on Salomon Bros. in the 1980s. Washington
25 April 2010: "Cheers at Goldman as housing market fell".
An example: after the fall of communism in Hungary, people had a
great urge to be free from oppressive, intrusive government
regulations, and the role of government was reduced to a bare
minimum. In 1994, there was a shortage of paprika powder, an
essential ingredient in most Hungarian dishes. Some small
enterprises began to paint unripe paprika red, with poisonous lead
paint, to make it look ripe. Dozens of unsuspecting customers had to
be hospitalized. People finally realized that it is unreasonable to
expect each consumer to buy a small sample of a new food product,
send it to a lab to analyze whether it is safe to eat, and then buy
more. The government has to test new products for consumption safety
accessed 7 April 2012).
There have been some warnings but mainly post hoc analyses, like
Raghuram G. Rajan's Fault
pointing to 35 years of increasing inequality in the USA: for every
dollar in real income increase 1976-2007 58% went to the richest 1%
of the households. Thus, in 2007 the hedge fund manager John Paulson
made 3.7 billion dollars, about 74,000 times the median income of US
households. More importantly: somebody paid that money. And James
Carroll writes (International
4 January 2011): "US Census data for 2010 show the widest
rich-poor income gap on record. In 1968, the top 20 percent of
Americans had about 7 times the income of those living below the
poverty line. By 2008, that disparity had grown to about 13. By
2010--more than 14." At the same time the percentage living
below half of the poverty line is increasing. And the war economy
benefits: "Over-investment in arms leads to their use, period".
Andrew Hacker, in "We're More Unequal Than You Think", The
New York Review of Books,
23 January 2012: "Internal Revenue Service data show that the
best-off 5% of families had 15.9% of the income in 1972, 16.1% in
1985 and 20.0% in 2010 while the Gini index of inequality rose from
.359 via .389 to .440. With such massive warnings the
diagnosis-prognosis-therapy triangle should have been forthcoming,
like it does from competent meteorologists for hurricanes, and
competent physicians for pandemics. An incompetent science.
The figures are shocking all over. In Spain there are close to 25%
living in misery, in "egalitarian Norway" the top 10% are
in command of 73% of the wealth, and so on. For an excellent Spanish
analysis, see Juan Díez Nicolás, "Poder Político y poder
30 August 2012 and for an excellent general analysis see Samir Amin,
"Financial collapse, systemic crisis? Illusory answers and
necessary answers", World
Forum of Alternatives,
Caracas, 2008, about "financiarized oligopolies". For
Amir's writings see www.michelcollon.info.
From 1973, with Robert Merton refining the equation to get the
prices right--US economists all three--Merton and Scholes got the
Swedish State Bank Prize in economics in 1997 after Black's death
(not Nobel prize). Maybe debt prison would have been a more adequate
response? But, as Charles Ferguson said when accepting the Oscar for
nobody has gone to jail for the worst financial crisis since the
A system breaks at its weakest points, like Lehman Bros. September
2008, or Madoff, the Ponzi pyramid scheme builder; leading to the
temptation to see Lehman Bros.-Madoff as causes, not as consequences
precipitating even worse consequences. Incidentally, 6 of the 10
biggest Lehman Bros. creditors were Japanese (International
17 September 2008). Naivete about The USA?
From the point of view
of catastrophe theory, the system was for some time in a stability
zone trading derivatives worth a quadrillion dollars a year by 2007,
"10 times the total worth, adjusted for inflation, of all
products made by the world's manufacturing industries over the last
century" (Ian Stewart, professor of economics, University of
Warwick). A gap between finance and real economy was closed by a DJI
crash from the 12,000s to the 6,000s in 2008. At the time of writing
March-September 2012 the DJI has passed 13,000 again, first time
since September 2008.
See the excellent article by Jean Ziegler about rice as a finance
product in Le
See "Vulture Investor Battles For Death-Bet Payoffs", Wall
20 April 2012.
In Spain real estate and construction are the sectors most behind in
paying their loans, thereby endangering banks. But the real crisis
is in the suffering due to foreclosures, so far about 150,000
"mortgage executions", with 238,000 pending (Soledad
Gallego-Díaz: "Hell and Good Intentions", El País,
English edition 5 March 2012). "Nothing could be done about
these evictions, we were told, because it would endanger the
stability of the system." Comments unnecessary.
5/2009, p. 133, has a photo from a Wall Street demonstration with a
message to the bankers ("banksters"?) watching from above:
As Andrew Hacker puts it: "The crucial fact is that the upward
flow of money has reduced the spending power of those lower down,
most notably the bottom 60 percent". op.cit.
There has been much research on negative attributes highly
correlated with becoming rich, such as ego-centrism,
self-righteousness, willingness to exploit, lack of empathy. George
Monbiot, columnist in The
17 January 2012), refers to studies by Belinda Board and Katarina
Fritzon, and by Paul Babiak and Robert Hare (Snakes
and Branko Milanovic (The
Haves and the Have Nots).
An additional factor producing wealth and inequality is simply
differences in luck; not ability, they could just as well have been